India is shocked with what is the greatest banking fraud in Indian history. PNB has been cheated of Rs 11,360 Crores by Billionaire Diamantaire, Nirav Modi and some Gem and Jewelry firms. Worse....This scam has been going on since 2011.
The Nation wants to know....How deep is this fraud? Is this the tip of the iceberg or are more banks involved? Companies owned by diamond merchants Nirav Modi and Mehul Choksi, defrauded PNB (Punjab National Bank) of more than Rs 11,360 Crores.
Let's understand how this scam took place and if Blockchain technology could have prevented it? Want to know more on business loans? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products.
This scam is being blamed on 2 PNB employees, but it runs far deeper.
This scam began in 2011 with a letter of undertaking (LOU), of a much smaller amount of Rs 800 Crores. For those who don't know, an LOU is a guarantee that the bank (PNB in this case), is obliged to repay the loan if the borrower (Nirav Modi in this case), does not repay the loan.
In an LOU, a bank allows its customers to raise money from another Indian Bank's foreign branch, in the form of a short-term credit. (The period is 90 Days). Generally, if a client (customer) does not repay the amount, it gets extended beyond the 90 days.
Nirav Modi was supposed to pay margin money (a certain amount of money as a guarantee to PNB, as this bank was issuing the letter of undertaking) and then he would be granted a credit limit to pay his overseas suppliers of rough diamonds. But, surprisingly in Nirav Modi's case, neither was he asked to pay any margin money nor was there any credit limit. Nirav Modi through his 3 firms, Diamond R Us, Solar Exports and Stellar Diamonds was getting quite a lot of money to pay off his overseas suppliers of rough diamonds, on a regular basis.
So how did this happen? Gokulnath Shetty, a Deputy General Manager with the foreign exchange department looking after import payments and posted at a PNB branch in Mumbai, and some other PNB employees connived with Nirav Modi and fraudulently issued LOUs on behalf of Nirav Modi Companies to foreign branches of Indian Banks, like Axis Bank and Allahabad Bank.
So these foreign branches of Indian Banks were paying the overseas suppliers of rough diamonds, on behalf of Nirav Modi's firms and the payment was guaranteed by PNB through the LOUs. This money goes to the overseas suppliers via PNB Nostro Accounts. PNB Nostro Account is a foreign currency account held in an overseas bank. Banks hold Nostro accounts with each other, for cross-border foreign currency transactions.
So how were these unscrupulous PNB employees able to escape undetected? Simple...They used SWIFT. Society for Worldwide Inter-Bank Financial Telecommunication also called SWIFT, is just like an IFSC Code used in domestic inter-bank money transfers. Banks are identified through alphanumeric SWIFT codes. SWIFT is used for International money transfers. Messages sent through SWIFT have the banks consent and guarantee.
For SWIFT to be issued, an official must log in and fill confidential information like the account number and the SWIFT code. SWIFT has 3 layers of security...A maker, checker and a verifier within the CBS (Core Banking System). Once the foreign branch of the Indian bank received the LOU via SWIFT, loans were disbursed to the overseas suppliers of Nirav Modi's firms.
In the case of PNB, SWIFT was not integrated with the bank's core banking system. SWIFT was like a fax, which was not integrated with CBS. So this fraud could never have been detected by the PNB management. Now, PNB will have to repay all these banks.
The Government is cracking down on Bitcoins and other cryptocurrencies FM Arun Jaitley has said that Bitcoins are not legal tender in India. But, Arun Jaitley is very interested in the technology that powers Bitcoins called Blockchain technology.
A blockchain is a shared public ledger. Every single confirmed transaction anywhere in the World, is recorded in the blockchain. Information held on the Blockchain exists as a shared and continually reconciled (accurate) database. This blockchain database is not stored at a single location. The records in the blockchain database are public and verifiable. There is no centralized database for a hacker to attack. This data is accessible to anyone with an internet connection.
So how could the PNB fraud have been prevented by Blockchain technology? If banks used blockchain technology, the fraud would have been detected on the same day. If an unauthorized LOU entered the system (PNB System), it would have been detected by higher-ups. The top management would have found something wrong. In fact, this scam would never have taken place as bank officials would be fools to risk it.
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The heart of this scam was a standalone LOU register at a PNB Mumbai branch. Fraudster employees misused the LOU register to send LOUs through SWIFT to foreign branches of Indian banks, to disburse loans to overseas diamond suppliers of Nirav Modi firms.
In the blockchain technology - No bank person whether of a higher level or lower level would be allowed to complete a transaction, all by himself. Blockchain Technology would have kept all bank personnel involved in the task within the loop. Any discrepancy would have been detected immediately and other banks would be warned. Be Wise, Get Rich.
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